Household savings and strongeconomic recoverystrong in the euro area.pdfVIP

Household savings and economic recovery in the euro area * Cristina Badarau Florence Huart † Ibrahima Sangaré‡ Abstract In some euro area countries, it is likely that households will start trying to lower consumption and save more (in order to repay their debts, for instance). Would a rising household saving rate impair economic recovery in the euro area? We study the effects of such a shock in one country of a monetary union using an open-economy dynamic stochastic general equilibrium (DSGE) model. We find that the effects on output both in the country hit by the shock and in the rest of union can be positive as long as net exports to the rest of the world can increase and fiscal policy is not restrictive. Keywords: open monetary union, spillovers, saving, indebtedness JEL Classification: H31, E21, E44, E62, F41 * Laboratoire LAREFI, Université de Bordeaux, Avenue Léon Duguit, 33608 Pessac Cedex, France. E-mail: florina- cristina.badarau@u-bordeaux.fr † Laboratoire EQUIPPE, Université Lille 1, Faculté des Sciences Economiques et Sociales, Villeneuve d’Ascq 59655 Cedex, France. E-mail: florence.huart@univ-lille1.fr ‡ Laboratoire LAREFI, Université de Bordeaux, Avenue Léon Duguit, 33608 Pessac Cedex, France. E-mail: ibrahima.sangare@u-bordeaux.fr 1 1. Introduction Before the financial crisis in 2008, households became increasingly indebted in the Euro Area (EA) countries – except in Germany. The ensuing economic and sovereign debt crisis caused huge losse